FX Weekly Overview (Brazil Issue)

Dollar to reflect US economic data, Central Bank minutes, inflation in Brazil, and the Middle East

The week in review

• In the US, the July Employment Situation Report (“payroll”) surprised negatively, showing much weaker-than-expected figures for the second consecutive month, raising doubts about the strength of the US economy.
• In Brazil, the Monetary Policy Committee (Copom) reduced the benchmark interest rate (Selic) by 0.25 percentage points and adopted a more neutral tone regarding next steps, reducing bets on the continuation of the rate-cutting cycle.
• News reports suggested that the United States and Iran were close to a new diplomatic agreement, but this did not materialize.

USDBRL variations | Daily: -0.44% | Weekly: +0.31% | Monthly: +0.31% | Annual: -7.18% | Over 12 months: -6.26%

Dollar index variations | Daily: -0.42% | Weekly: -0.36% | Monthly: -0.36% | Annual: +1.24% | Over 12 months: +1.44%

KEY EVENT: US economic data

Expected impact on the USDBRL: bearish

The foreign exchange market is expected to react to the release of US economic data, particularly inflation figures, in an effort to calibrate expectations for the Federal Reserve’s (Fed) next moves.

• These indicators have gained greater importance following weaker labor market data for the second consecutive month.

Why this matters: The expectation of softer US inflation data should reduce investors' bets on further Federal Reserve rate hikes, lowering yields on US Treasury securities, discouraging foreign capital inflows, and thereby weakening the dollar globally.

Estimates: The median estimate for the US Consumer Price Index (CPI) suggests its monthly variation will rise from -0.4% in June to 0.1% in July, while the core index, which excludes the more volatile food and energy components, is expected to increase from 0.0% to 0.2% during the same period.

• Meanwhile, the median estimate for the Producer Price Index (PPI) forecasts its monthly variation will rise from -0.3% in June to 0.1% in July for the broad index, with the core index maintaining a 0.2% increase.
• If these estimates are confirmed, they would represent another soft inflation reading for the US, suggesting there is no urgency for further Fed rate hikes.
• Retail sales, on the other hand, are expected to expand by 0.2% in July, the same pace as in June.

“Payroll” surprises again: Last week, the Employment Situation Report surprised investors by showing much weaker-than-expected figures for the US labor market for the second consecutive month.

• The United States recorded a net loss of 23,000 jobs in July, well below the median estimate of 80,000 job gains.
• Additionally, data from previous months were revised downward for the second consecutive month, reducing the total number of jobs originally reported by 177,000 after these two revisions.
• Furthermore, the unemployment rate fell again, as a result of people leaving the labor force.
• In two months, 984,000 people stopped working or looking for work.
• As a result, the labor force participation rate fell to 61.4%, the lowest level since February 2021.

Interest rate hikes in doubt: In addition to weaker economic data, investors have also reduced their expectations on further US rate hikes after the Federal Reserve seemed less resolute in fighting inflation.

• In its July 29 decision, Fed Chair Kevin Warsh created this impression during a press conference by refusing to present an action plan to achieve price stability.
• Warsh declined to explain why the US central bank decided to keep rates steady despite significant concerns about inflation above target, nor did he specify which criteria might prompt the Fed to raise rates in the future.

Central Bank of Brazil minutes

Expected impact on the USDBRL: bearish

The foreign exchange market is expected to react to the release of the minutes from the Central Bank’s (BC) Monetary Policy Committee’s (Copom) latest decision, in which the committee lowered the benchmark interest rate (Selic) from 14.25% to 14.00% per year.

• In the statement, the central bank adopted a more neutral tone regarding its next steps, which reduced the likelihood that the cycle of interest rate cuts would continue.
• In this context, the minutes should provide further clues about the balance of risks discussed by Copom and help shape investors’ expectations regarding the conduct of Brazilian monetary policy.

Why this matters: If the meeting minutes indicate a more cautious tone on the part of Copom, investors are likely to increase their bets on a pause in the cycle of Selic rate cuts.

• This, in turn, tends to increase the attractiveness of domestic government bonds and boost the performance of the Brazilian real.

More neutral tone: In the statement issued following its latest decision, Copom adopted a more concise and objective tone, acknowledging an uncertain outlook and reinforcing a cautious stance regarding its next steps, without committing to any specific measures.

• In addition, the monetary authority reaffirmed its objective of bringing inflation in line with the target and acknowledged an upward bias in the balance of inflation risks—that is, that upside risks outweigh downside risks.

Improvements in communication: The statement from the previous meeting in June was poorly received by investors because it cited the first quarter of 2028 as the relevant horizon for the next monetary policy decision—one quarter longer than the Copom typically uses—which was interpreted as an “improvisation” to justify further cuts to the Selic rate and weighed on the BRL's performance in the trading session following the decision.

• This time, however, the latest statement was praised by financial markets for its more neutral and objective tone, which avoided the excerpts that had raised doubts in the previous release.
• Greater clarity on the part of the monetary authority tends to reduce uncertainty and provide clear guidance to market participants.

Inflation data in Brazil

Expected impact on the USDBRL: bullish

Amid uncertainty about the Copom’s next steps, the release of July’s Broad National Consumer Price Index (IPCA) should help investors gauge their expectations regarding the trajectory of inflation and interest rates in Brazil.

Why this matters: A further slowdown in inflation tends to increase expectations of more Selic rate cuts, which lowers yields on domestic bonds and tends to weaken the BRL.

Estimate: The median projection in the Focus bulletin anticipates that the monthly change in the IPCA will slow from 0.16% in June to 0.08% in July, reinforcing the perception of lower inflationary pressures.

• If confirmed, this figure would bring the 12-month cumulative inflation rate down from 4.64% to 4.46%, within the tolerance margins of the inflation target.

Recent data: The most recent inflation figure was the July reading of the Broad National Consumer Price Index 15 (IPCA-15), which slowed from 0.41% in June to 0.06% in July, below the median estimate of 0.20%.

• The core component of the index—which excludes the most volatile food and energy components—saw its rate of increase slow from 0.37% in June to 0.19% in July, reinforcing the perception of a benign inflation reading for the month.

Outlook for the Brazilian economy: In the current context, the inflation trajectory has been the primary concern among investors and monetary authorities, as the resurgence of conflict in the Middle East and the latest rise in crude oil prices have generated global inflationary pressures and hindered the convergence of inflation toward the target in Brazil.

• With regard to economic activity, cumulative growth as measured by Gross Domestic Product (GDP) and the Central Bank’s Economic Activity Index (IBC-Br) has slowed in recent months, which reinforces the view that there is room for the cycle of interest rate cuts to continue.
• On the other hand, the labor market remains strong, with the unemployment rate at 5.4 percent—close to historic lows—which points to resilience and calls into question the continuation of interest rate cuts.

Middle East

Expected impact on the USDBRL: bullish

On the geopolitical front, investors continue to monitor news about diplomatic negotiations in the Middle East and the reopening of the Strait of Hormuz.

Why this matters: The lack of signs of concrete diplomatic progress heightens investors’ perception of risk, which reduces risk appetite and hurts the performance of assets considered risky, such as stocks and currencies from emerging markets.

• On the other hand, the lack of prospects for a rapid return to normalcy in traffic through the Strait of Hormuz is likely to keep global crude oil premiums high, which could boost the performance of currencies from oil-exporting countries, such as the Brazilian real, the Swedish krona, and the Russian ruble.

Status of the negotiations: Geopolitical news continues to be rife with disagreements regarding the level of consensus and the conditions for an agreement between Iran, Oman, and the US to resolve the conflict and restore the flow of traffic through the Strait of Hormuz.

• More recently, it was reported that Iran and Oman had reached a consensus on how the flow of ships through the Strait of Hormuz would work under a toll system—a model that the US rejects as a condition for formalizing any agreement.
• On the other hand, last week, US President Donald Trump stated that an agreement between the countries was imminent and that some important details still needed to be worked out.
• In this context, conflicting signals regarding the progress of the negotiations are keeping investors in the dark, which tends to reduce their risk appetite until more concrete signals are provided.

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